The Retirement Income Policy Review - Kapiti, why it matters for young and old

April 2013

We have the chance right now to make a real difference to the quality of life our newest employees will enjoy when they retire.

Kapiti has become a haven for region's retired population but future generations may be set for a struggle.

The Retirement Commissioner's review of retirement income policy happens only once every three years and is currently underway.

We now have the opportunity to ask what has changed since 2010 and how can we do better.

For a start, we no longer believe that NZ Superannuation alone is enough for us to retire on. NZ Super currently provides a maximum of $349 per week for an individual and $537 per week for a couple.

The Financial Services Council (FSC) recently released the results of a Horizon Research survey showing only 9 per cent of New Zealanders believe that NZ Super alone will be sufficient for them to live on when they reach the age of entitlement.

In an earlier Horizon Research survey most New Zealanders defined 'comfortable' as a weekly living amount that is about twice that of the NZ Super entitlement, or about $300 more per week for an individual and $500 more per week for a couple.

Many of the 2 million people who have joined KiwiSaver may mistakenly believe that at a 2 per cent contribution by employee and employer (rising to 3 per cent from 1 April) will cover the shortfall between NZ Super and a comfortable retirement. But we know that this is simply not the case.

Our calculations show that people need to save 10 per cent of their income from the time they start working, at 25 years for example, to achieve a comfortable retirement. That percentage increases rapidly as people delay starting to save for their retirement.

If we start saving after 50, we need to save half our income to fund such a comfortable retirement. Only about one in every 10 KiwiSaver members are currently saving at a rate sufficient to fund a comfortable retirement.

Even if we all save at the rate of 10 per cent of income, we will continue to fall behind the rate of saving in Australia, and that's before Australians increase their rate of compulsory retirement saving from 9 per cent to 12 per cent as they have agreed to do.

In its report Pensions for the Twenty-First Century: Retirement Income Security for Younger New Zealanders the FSC identified that the retirement income of Australian graduates beginning their first job in 2011, who have earned the median wage throughout their working life, will be 2.3 times higher than their New Zealand equivalents.
Australian wages may be 30 per cent higher but that does not account for a difference in retirement income of more than 200 per cent. The difference can only be explained by a vastly more effective approach to retirement savings.
Previous retirement income policy reviews have mainly focused on those people who are soon to retire. What we really need from the coming review is a policy that addresses the issue of retirement income for young New Zealanders.

They have the most to gain from getting retirement policy right. That's because most of them are going to live longer after the age of entitlement to NZ Super than any generation before them.

We now know that the number of years that we will live after the age of 65 is growing at twice the rate that we used to assume. Our grandparents lived for 10-20 years after they reached the age of entitlement for superannuation but the majority of today's school leavers can expect to live for 20-30 years after the age of entitlement.

Young New Zealanders who start saving for their retirement as soon as they begin working have the most to gain from compound returns on their savings. Interest earned on the interest saved means that we can get bigger pensions from saving for retirement rather than simply paying for pensions out of today's taxation. Provided that the rate of return from savings is greater than the growth rate of the economy, we can fund bigger pensions in retirement by saving when we are working than funding from tax.

NZ Super and KiwiSaver both have a part to play in providing New Zealand employees with a pathway to a comfortable retirement. NZ Super is the best first-tier age pension in the world but it needs to be supplemented with wider participation in KiwiSaver and a gradual lift in contribution rates into KiwiSaver as wages and salaries increase if most New Zealanders are to have a comfortable retirement.

We all know that we will probably regret not having done more in terms of our savings when we reach retirement age. But for the next generation this will not just make the difference between comfort and luxury but between poverty and comfort for an extended period in their lives. Being frugal to 'get by' just won't cut it for 20-30 years.

Young people need to be a part of this retirement income debate. So if you're over 40 and you know someone who is about to start working for the first time, talk to them about it. It could be the most significant gift you give them for a better future long-term.

So the coming review must:

Acknowledge that our tax paid pension is a good first-tier scheme but
does not deliver a comfortable retirement for those who rely solely on it

Look to increase long-term savings, especially amongst the young, to ensure retirement incomes can more than double – without imposing an extra burden on taxpayers, and

Acknowledge that the economy can benefit from using billions in retirement savings

Funding retirement incomes in 1955 and 2055:

RETIREMENT IN THE 20TH CENTURY RETIREMENT IN THE 21ST CENTURY
Funding retirement incomes in 1955 Funding retirement incomes in 2055
Over 65 population less than 300,000. Over 65 population reaches almost 1.7 million.
Life expectancy at 65 - 12.8 years for males and 16.9 years for females. Life expectancy at 65 – 31.3 years for males and 33.9 years for females.
Seven working age people support one pensioner. Two working age people support one pensioner.

Age pensions cost 3% of GDP when the universal pension was available from 65.
Age pensions will cost 9-10% of GDP if the age of eligibility for NZS stays at 65.

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